your goals at least annually, perhaps twice a year, but don’t be measuring everything all of the time. It takes time to reach some of these goals, you just want to make sure you are staying on the right track and moving forward. If not make adjustments.
Your Net Worth
This chapter is devoted to a discussion of your net worth. Just remember to not confuse who you are as a person, with the sum of your financial situation. Some times we get caught up with “Keeping Up With the Jones”. Who has the nicest car, home, takes the best vacations etc. Status is important to some people. But remember, “The most important things in life are not things.” Having said that, we still want to feel like we are making progress in our lives financially so a simple scorecard of that progress is your net worth. Think of your net worth then just as a scorecard to measure how you are progressing toward your goals.
What Do You Have Now
Every journey needs a starting place. Before you start off on a family vacation, you take an inventory of what all you need to bring, you then pack your bags and maybe even recheck everything before you depart.
Figuring out your net worth (what you have today) is a lot like family vacation planning. Establishing your net worth is an essential step to personal financial planning because it provides you and your family with a measurement that helps to determine your financial progress. If you get off track a bit, your goals and this measurement of your financials will help tell you if you need to make any adjustments.
Your net worth is all of your assets minus all of your liabilities. By reviewing your net worth statement annually, you will be better able to see the results of your planning efforts and the amount of funds you have to work with for future planning. Comparing your financial goals to your net worth helps you determine if adjustments or in order or if you are right on track.
Generally speaking your net worth should increase every year. If you find your net worth is not increasing annually, you may wish to consider seeking a professional financial planner to help develop a plan to get this going in the direction you want.
You can determine your net worth on a simple sheet of paper or you can use an online service like quicken or mint.com. If you have a computer, this can be done as a simple spreadsheet, or you can just use a few sheets of paper.
Let’s start with assets. List your current assets first. A current asset is any cash or other items that could be converted to cash quickly. This includes cash in the bank, savings, all of your stocks, bonds, mutual funds etc. held in your name and not subject to a tax if withdrawn. If you have a cash value life insurance policy, you can include the cash value (more on insurance later). You can also include any money owed to your by others. Now add these items up. This is now your current assets.
Now let’s look at items that are not easy to convert to cash, or your fixed assets. This included your home, cars, motorcycles, household furnishings, sports and hobby gear. All of these items can be converted to cash, but it will take some time to list them for sale, find a buyer and agree on a price. List these items as assets even if you owe money on them, we will come to debts in a minute.
The last section on your asset list includes all of your deferred assets. This is anything you expect to receive in the future, company savings or profit sharing plans, pensions, retirement plans are all deferred assets. List these and add them up.
Now to get the total of your assets just add all of your current, fixed and deferred assets. This is your total assets. Set this number aside for a second, so we can turn our attention to liabilities.
Liabilities are what you owe to someone else. This includes the mortgage on your house, personal loans, car loans and credit card debt. It might also include any student loans, lines of credit and even if you took out a loan from a retirement account or cash value life insurance policy (You should never do this BTW).
Now total your liabilities, and subtract this number from the total of your assets. There you have it, you just figured out your net worth.
How To Get Where You Want To Be
Today does not define who you are, where you are going or how you will get there. Despite tough times, you are still in charge of your life, your future and what you make of it. The financial world is full of examples of people who started with nothing and build their finances to the point they were free of debt and worry. If you have lost everything, you really have no choice but to start over. If you have been an investor in the stock market (even with just a retirement plan), and lost half you nest egg, now is not the time to hide in the sand and doing nothing. Remember an education is power and a financial education is financial power. It allows you to take charge of your money and make it work harder than you do.
Remember this adage: “Failure to plan is planning to fail.”
Create a financial plan by first knowing where you are now (setting your net worth), then comparing that to where you want to be in the future. Once you know your direction, the next step is creating the plan. It is just like planning a trip, first you figure out where you want to go, and then you plot your trip on a road map. Along the way to check off the mile markers to figure out if you are there yet.
Before we move on, remember this is a financial measure, not a personal measure. I have found too many times people get all caught up with measuring their worth with how much money you have. Money is just a medium of exchange; it helps you get you where you want to buy. Remember the Beatles hit record “Can’t Buy Me Love”? You can have a lot of happiness by having enough money to buy the things in life you need or even want, but you can’t buy love, that has to come from within you. Now let’s move on to the next step, personal budgets.
Make your Money Work For You
Do you find it difficult to stick to a budget? I know I do, there is always something on sale, or maybe just more month than money. I have always liked this proverb: ”The art is not in making money, but in keeping it.”
Right now you are in your prime spending years, you are working, married with kids to match, and everything is under control, right? Well not if you don’t have a budget that is aligned to your financial goals. The only way to make your money work harder than you do, is to bring it under control, rein in your spending on things you don’t need and create a plan to make your money work.
How Do You Spend Your Money
You may be very careful with your money or you may be carefree the choice is yours. But each choice has a result (perhaps planned, or perhaps unintended).
Once you have identified your net worth, the next step is to look at your income and expenses. It is important to establish where you money is coming from (source of funds) … and where it is going.
There are several things you can be fairly certain of as you plan for your future.
First, you have to deal with the effects of inflation. Inflation erodes your spending power. You can check this out at http://www.inflationdata.com. Over the last ten years, the highest rate of inflation has been 5%. Remember that rule of 72 from chapter one? It can also be used to determine how quickly inflation reduces your spending power. Just use the rate of inflation and divide it into 72 to determine how quickly your spending power is reduced.
Second, you need to know how important it is to distinguish
